Zero-hours contracts have become a familiar feature of the UK labour market, particularly in hospitality, retail, social care, and seasonal agriculture. For small businesses, they offer a practical way to flex staffing levels without committing to guaranteed hours. But they are also one of the most misunderstood employment arrangements in Britain — and getting it wrong can lead to costly Employment Tribunal claims, HMRC penalties, and reputational damage. Whether you run a café in Bristol, a cleaning company in Leeds, or manage payroll for a handful of SME clients, this guide will walk you through what you legally must do and what best practice actually looks like.
What Is a Zero-Hours Contract?
A zero-hours contract is an employment or worker agreement under which the employer does not guarantee any minimum number of working hours. The worker is called upon as and when the business needs them, and they are under no obligation to accept the work offered — in theory, at least. The term is not defined in a single piece of legislation; instead, it sits within the broader framework of employment and worker rights under the Employment Rights Act 1996 and subsequent legislation.
It is worth being precise about employment status here. Zero-hours staff can be classified as employees, workers, or — far more rarely — genuinely self-employed contractors. Most will be workers, which sits between full employee status and self-employment. Workers do not have all the rights of employees (for example, protection from unfair dismissal), but they do have significant statutory entitlements that many employers overlook.
The Legal Rights Zero-Hours Workers Are Entitled To
This is where many small business owners come unstuck. Just because someone works irregular or minimal hours does not mean their employment rights evaporate. Zero-hours workers who qualify as workers — as the majority do — are entitled to:
- National Living Wage / National Minimum Wage: From April 2025, the National Living Wage for workers aged 21 and over is £12.21 per hour. This applies to every hour worked, with no exceptions for casual or zero-hours arrangements.
- Paid annual leave: Workers accrue 5.6 weeks of paid holiday per year, calculated on a pro-rata basis. For irregular hours workers, holiday pay must reflect their average pay over the previous 52 weeks worked (ignoring weeks with no pay).
- Rest breaks: The Working Time Regulations 1998 apply — workers are entitled to a 20-minute rest break if they work more than six hours in a shift, plus minimum daily and weekly rest periods.
- Protection from unlawful deductions from wages under the Employment Rights Act 1996.
- Auto-enrolment pension obligations: If a zero-hours worker earns more than £10,000 in the current tax year and is aged between 22 and State Pension age, you must enrol them in a qualifying workplace pension scheme.
- Statutory sick pay (SSP): Eligible from the first day of sickness absence, provided the worker earns at least the lower earnings limit (£123 per week in 2025/26) over the relevant period.
Failing to pay holiday pay is one of the most common errors. Courts and tribunals have consistently found against employers who assumed zero-hours arrangements removed this obligation. It does not.
Exclusivity Clauses: What You Cannot Do
The Small Business, Enterprise and Employment Act 2015 made exclusivity clauses in zero-hours contracts unenforceable. In plain terms, you cannot legally prevent a zero-hours worker from also working for another employer. Attempting to enforce such a clause, or penalising a worker for taking other work, is unlawful.
This matters in practice. If you run a restaurant and your kitchen porter also picks up shifts at the hotel down the road on quiet weeks, you have no legal basis to object. Some employers find this uncomfortable, but the rationale is sound: if you are not guaranteeing hours, you cannot reasonably expect workers to rely on you as their sole source of income.
Payroll and HMRC Obligations for Zero-Hours Staff
One area that catches small employers out is payroll administration. The irregular nature of zero-hours work does not reduce your HMRC obligations — if anything, it creates more administrative complexity. Every time you pay a zero-hours worker, you must submit a Full Payment Submission (FPS) to HMRC in real time under the RTI (Real Time Information) payroll system. This applies even for one-off or very small payments.
Tax codes, National Insurance contributions, and student loan deductions all need to be applied correctly, and the calculations can vary week to week depending on earnings. If a worker's pay falls below the Lower Earnings Limit in one pay period but above it in another, their NI treatment changes accordingly. This is easy to manage if you have reliable payroll software, but it becomes a genuine burden if you are relying on manual calculations or spreadsheets.
BizHub365 includes full RTI-compliant payroll built directly into the platform, meaning FPS submissions are handled automatically each pay run — no bridging software, no separate payroll bureau needed. For small businesses with fluctuating headcounts and variable pay periods, this kind of integrated approach saves considerable time and reduces the risk of late or incorrect submissions to HMRC.
Upcoming Changes: The Right to a Predictable Contract
UK employment law is not standing still. The Workers (Predictable Terms and Conditions) Act 2023 received Royal Assent in September 2023, and its provisions are expected to come into force in 2026. Once in effect, workers and agency workers who have been engaged for at least 26 weeks will gain the right to request a more predictable working pattern — including fixed hours, fixed days, or a fixed-term contract.
Employers will be required to consider such requests in a reasonable manner and can only refuse them on specific statutory grounds (for example, the burden of additional costs, or a detrimental impact on performance). This does not mean zero-hours contracts will be abolished, but it does mean businesses will need a clear, documented process for handling these requests. Failing to respond appropriately could result in Employment Tribunal claims carrying compensation awards of up to eight weeks' pay.
Now is a good time to review your current zero-hours arrangements and think about which workers might realistically qualify for a more predictable pattern when the legislation takes effect.
Best Practices for Small Businesses Using Zero-Hours Contracts
Legal compliance is the floor, not the ceiling. Here are some practical steps that will protect your business and build a more engaged workforce:
- Issue a written contract on day one. Even for zero-hours arrangements, workers are entitled to a written statement of their main terms on the first day of employment. This should clearly state the nature of the arrangement, pay rates, holiday entitlement, and how shifts will be offered and accepted.
- Track hours and holiday accrual accurately. Disputes over holiday pay are far easier to defend when you have reliable records. Use software that logs hours as they are worked and calculates accrual automatically.
- Communicate clearly and consistently. Give workers as much notice as possible when shifts are available. Last-minute cancellations damage trust and can, in some circumstances, give rise to claims if they form part of a pattern of unreasonable treatment.
- Review employment status periodically. If a zero-hours worker has been working regular, predictable hours for an extended period, they may have acquired employment rights beyond those of a basic worker — including potential claims for unfair dismissal. HMRC's CEST (Check Employment Status for Tax) tool is a useful starting point for periodic reviews.
- Do not use zero-hours contracts where they are not appropriate. If you genuinely need someone to work 30 hours a week on a consistent basis, a zero-hours arrangement is the wrong tool. Using it to avoid employment protections can backfire badly at tribunal.
Conclusion
Zero-hours contracts are a legitimate and useful tool for many UK small businesses, provided they are used appropriately and managed carefully. The workers on these contracts have real rights — to fair pay, holiday, rest, and increasingly to a more predictable working pattern — and it is your responsibility as an employer to honour them. The administrative burden, particularly around payroll, is manageable with the right systems in place. If you are spending more time wrestling with FPS submissions and holiday pay calculations than actually running your business, it may be worth exploring an integrated platform like BizHub365 to take that complexity off your plate. The legal landscape around zero-hours contracts is evolving — staying informed now will save you a great deal of difficulty when the next wave of reforms arrives.